This updates our previous blog entry, “An Inter-Provincial Schism Over Class Counsel Fee Sharing Arrangements”, located at http://www.mlt.com/class-actions/an-inter-provincial-schism-over-class-counsel-fee-sharing-arrangements/.

In our previous blog we noted that Canadian superior courts are sending mixed signals over the use of “fee-sharing arrangements” to resolve carriage disputes among competing class counsel. In Bancroft-Snell v Visa Canada Corporation, 2015 ONSC 7275 Perell J. took strong exception to this practice, holding that the fee sharing agreement in question was unauthorized, unenforceable and potentially illegal (ibid at para 64). Perell J. reduced Class Counsel’s fees by 10%, and prohibited them from paying any of the agreed-upon fees under the fee-sharing arrangement to the discontinuing firm.

Class counsel in Bancroft-Snell appealed Perell J.’s decision to the Ontario Court of Appeal, along with counsel for the firm which had been deprived of its fees under the agreement.

Writing for a unanimous Court in Bancroft-Snell v Visa Canada Corp, 2016 ONCA 896, Blair J.A. substantially upheld Perell J.’s decision finding that the Ontario Superior Court of Justice has the authority, under Ontario’s class action regime, to review fee sharing agreements to determine whether they are fair, reasonable, and in the best interests of the class (ibid at para 61).[1] If they are not in the best interests of the class they will not receive judicial approval, even if agreed upon in advance by counsel.

Blair J.A.’s reasoning indicates that many fee sharing arrangements may not be in the best interests of the class, particularly where the agreement is structured so that the ‘buy-out’ for discontinuing counsel comes from the amounts set aside for class members. Blair J.A. noted:

61… To the extent the fee sharing payment reduces the amount to be received by the class from the settlement, it becomes subject to the court’s supervisory review in order to ensure that the shared fee and the legal services it purports to represent are fair and reasonable and in the best interests of the class.

91 The issue on a fee approval motion is not so much whether the carriage dispute or the carriage settlement was justified. The issue is who should bear the cost of that fight – the lawyer participants for whose primary benefit the struggle is waged, or the class members? It seems to me that it is the lawyer participants who should bear the costs.

92 If class counsel see it in their bests interests to resolve carriage disputes by agreeing privately, amongst themselves, to remunerate one set of class counsel for leaving the scene, that is a matter for their private business determination. But they should bear the cost of that business decision as well, in my view. The class members ought not to be exposed – either directly or through some form of “potential carriage dispute mark-up” built into the contingency fee negotiated with the class members – to having to pay for what is essentially a general business expense of the firm associated with the litigation and not an expense providing any added value to the class action itself.

Accordingly, Blair J.A. held that the motions judge was entitled to prohibit Class Counsel from making any payments to the discontinuing firm out of Class Counsel’s fees or out of the settlement funds, in order to give effect to his determination that the class members should not bear the burden of the fee sharing agreement.

However, Blair J.A. held that the motions judge erred in ruling that the fee sharing agreement was unenforceable in its entirety, without granting discontinuing counsel the opportunity to make submissions. Theoretically then, the Court of Appeal’s decision grants class counsel latitude to continue to use fee sharing arrangements, as long as the agreements are structured so that the fees paid to discontinuing counsel do not deprive the class of any funds.

Although courts in other provinces, notably Saskatchewan, have not disavowed the use of fee-sharing arrangements (see our previous blog), the Bancroft-Snell decisions could have a significant impact on their future use.